Away From Beef, Towards Poultry And Dairy Sectors

Latin America | Agribusiness | Tue Jul 02, 2013

BMI view: We see the lowest meat consumption growth in Latin America on a global basis, especially for beef. Therefore, we expect correspondingly slow growth for large beef producers such as Brazil and Argentina. For poultry and pork, we are significantly more optimistic for growth prospects in the region over the medium term. For dairy, we expect strong demand growth potential for milk and other dairy products in the medium term. These changes will be due to several reasons including base effects, economic, political and cultural factors.

Out of all the emerging regions we cover, we see the slowest growth potential for meat consumption in Latin America, for beef in particular, and therefore corresponding to slow growth for large beef producers such as Brazil and Argentina. This is because meat consumption per capita in the region, especially beef, is among the highest in the world even though it grew at a slower pace than other markets in Africa and Asia in the past decade. Meat consumption in Latin America averaged 60.0kg per capita in 2012, compared to 72.5kg for Europe and North America, and 23.5kg in Asia and Africa (excluding developed markets, i.e. Australia, Hong Kong and New Zealand). As a result, Latin America is getting closer to developed market standards in terms of meat consumption. This happened even though meat consumption per capita growth in the past decade was much slower in Latin America (at 19.6% between 2000 and 2012) than in Africa and Asia (at 30.2% over the same period).

Away From Beef, Towards Poultry And Dairy Sectors

Latin America | Agribusiness | Tue Jul 02, 2013

BMI view: We see the lowest meat consumption growth in Latin America on a global basis, especially for beef. Therefore, we expect correspondingly slow growth for large beef producers such as Brazil and Argentina. For poultry and pork, we are significantly more optimistic for growth prospects in the region over the medium term. For dairy, we expect strong demand growth potential for milk and other dairy products in the medium term. These changes will be due to several reasons including base effects, economic, political and cultural factors.

Out of all the emerging regions we cover, we see the slowest growth potential for meat consumption in Latin America, for beef in particular, and therefore corresponding to slow growth for large beef producers such as Brazil and Argentina. This is because meat consumption per capita in the region, especially beef, is among the highest in the world even though it grew at a slower pace than other markets in Africa and Asia in the past decade. Meat consumption in Latin America averaged 60.0kg per capita in 2012, compared to 72.5kg for Europe and North America, and 23.5kg in Asia and Africa (excluding developed markets, i.e. Australia, Hong Kong and New Zealand). As a result, Latin America is getting closer to developed market standards in terms of meat consumption. This happened even though meat consumption per capita growth in the past decade was much slower in Latin America (at 19.6% between 2000 and 2012) than in Africa and Asia (at 30.2% over the same period).

Beef consumption growth in Latin America (LatAm)'s largest producers, Brazil and Argentina, will stall by the end of our forecast period. Beef consumption per capita in both countries has increased by 57.3% in Brazil and 65.2% in Argentina between 2000 and 2012 and now stands at 40kg and 46kg respectively; not far behind the US (at 50kg per capita), which is the highest consumption in the world. These consumption habits are linked to the size and the quality of the cattle herd in these countries as well as the abundance of pastures and feed stock. Also, in Argentina, beef prices are highly regulated by the government, encouraging demand. These ensure strong growth in beef production as well as generally low prices for beef. These similar factors were a basis for beef consumption per capita in North America and Australia to reach their current highs.

However, in all of the largest beef consuming countries, we are already seeing a pullback in red meat consumption linked to health concerns. In fact, in the US, Canada and Australia, we forecast stagnant to negative beef consumption growth over our forecast period. For Brazil and Argentina, we see similar growth trends out to 2017 and expect stagnant consumption growth per capita in the coming years. We see a more mixed picture for the rest of the LatAm region, depending on where consumption per capita stands in 2012. Overall, however, we see the largest beef consumption growth opportunities in Asian and African countries over the coming five years.

For poultry and pork, we are significantly more optimistic over the medium term on demand growth prospects for the region. For Brazil and Argentina, we expect some of the current beef consumption to be diverted to poultry in the coming years due to the increasing health consciousness of growing middle classes, and generally lower retail prices for chicken than for beef. Other countries in the region will even see large consumption-per-capita growth over the forecast period, with Mexico, Colombia and Venezuela following on the list with 3-5% growth out to 2017. Pork has even more potential for growth in the region since current pork consumption per capita is low by global standards. However, pork consumption has been slower to pick up in recent years as the region has not managed to boost production capacity, leaving prices generally less attractive than for poultry.

These dynamics mean that booming beef production in LatAm will mainly supply growth in exports, while poultry and pork production will increasingly feed domestic markets. We forecast beef production in Brazil and Argentina to rise by 19.3% and 26.6% respectively out to 2016/17 (mainly from base effects and recovering to previous highs), while consumption will increase by only 4.5% and 8.0% respectively over the same period. On the contrary, poultry production will increase by 29.2% and 33.3% in Brazil and Argentina, while consumption will grow by 18.9% and 22.4% respectively over the next five years. As a result, we expect the region to remain a major exporter of beef over the medium term, but we see more challenges for export growth in the poultry and pork segments in the long term.

For dairy, we expect strong demand growth potential for milk and other dairy products in the medium term. This is because, paradoxically, the region has the world's largest live cattle herds but maintains low dairy consumption per capita. Apart from Uruguay and Colombia, countries in the region drink 46kg of fluid milk per capita every year, compared to 120kg in the UK and 90kg in the US. Even if LatAm is not as significant for global milk supply as the US or the EU, it produces about 2.6 times more milk than it consumes so there is room for demand to increase without putting pressure on current balances and stocks. Over the coming years, we expect dairy production growth to accelerate (by 18.2% out to 2016/17), partially boosted by prospects for domestic consumer markets (demand is set to grow by 14.3% over the forecast period).

Implications For Key Players

Our outlook for consumption trends in the meat and dairy sector have significant implications for our views on the companies involved in the region. We are cautious on Brazilian beef producer JBS's growth prospects if the company does not succeed to diversify away from beef and into more profitable and higher growth markets, such as poultry, pork and dairy. Although we expect a recovery in the company's results as grain prices moderate, we still expect most of the sales growth in the coming quarters to come from the company's poultry assets, Pilgrim's Pride. JBS has indicated recently that it wants to boost its presence on the domestic Brazilian milk market through acquisitions and capacity expansion. The company also decided to spin-off its dairy unit, Vigor, and to list it separately in order to boost valuation for the division it values as the most promising. Peru's largest agribusiness conglomerate, Gloria, is specialised on the dairy sector and should see tremendous growth linked to increases in consumption per capita over the next decade.

Obesity Rates By Country/Region

Source: Harvard School Of Public Health; Note: Data included is the latest available, an adult is considered obese if their body mass index exceeds 30

North America (all adults)

36% and 69% overweight in 2010

Central and Southern America (Women)

30% in 2008

Central and Southern America (Men)

25% in 2008

Mexico

30% of adults and 70% overweight in 2006, a 12% increase compared to 2000

Western Europe (Women)

15-20% in 2008

Western Europe (Men)

20-25% in 2008

Eastern Europe (Women)

25-30% in 2008

Eastern Europe (Men)

15-20% in 2008

China

10-11% in 2009

India

14% in 2005

…And Health Policy

As we highlighted previously for sugar ( see 'Regional Sugar Consumption Growth To Stall', 05 June 2013), we expect these changes in consumption habits to be supported by increasing government programs to combat obesity in LatAm. The region has very similar obesity levels to North America, and more governments are launching their own programs to limit the sugar and fat intake in diets, especially for children. Peruvian President Ollanta Humala signed a law on May 20th designed to reduce child obesity by encouraging healthier eating habits in schools. The law will target fatty foods and soft drinks in particular, the first step in a plan to ban junk food all together in schools. In Chile, a new program, called Elige Vivir Sano (Choose to Live a Healthy Life), encouraging healthier habits among the population has begun. The program's director indicated that there is a high percentage of Chileans with obesity problems, causing more than 7,800 deaths a year. Mexico has announced several times it would implement a strategy to combat obesity as child obesity alone costs about US$67bn annually in public health expenditure.